Comprehensive Review of the Northwest Energy System

After the National
Energy Policy Act of 1992 began the steady restructuring and deregulation of
the nation’s electricity industry, the Bonneville Power
Administration found itself in an unusual and troubling position. Bonneville is
the federal agency that sells nearly half of the electricity consumed in the
Northwest. Bonneville’s long-captive customers suddenly had the opportunity to
leave the Bonneville system for lower-cost providers of electricity. In the
mid-1990s, there were concerns that Bonneville’s high fixed costs, including
its past investments in nuclear power plants through the
Hydro-Thermal Power Program, and costs for fish and wildlife recovery would make it
uncompetitive in the wholesale power marketplace.

The
key issue, in fact one that had been around since construction of Grand Coulee
and Bonneville dams began in the early 1930s, was whether a power-supply entity
like Bonneville should be public or private and who would control the
generation, sale and transmission of power from federal dams. In January 1996,
at the request of the governors of Idaho, Montana, Oregon and Washington, a
committee of 20 persons with expertise in energy, environmental restoration,
economics, and government began a year-long investigation of Bonneville’s
current and future activities in a process called the Comprehensive Review of
the Northwest Energy System. In December 1996, the Comprehensive Review
reported its recommendations, which included a proposal that Bonneville begin
selling its power by subscription in blocks and at prices that would be set in
the contracts. Long-term subscription — up to 20 years — would be favored in
order to provide financial security to Bonneville. Short-term contracts would
be allowed, but with a premium, or “option fee,” if the customer wished to
continue buying from Bonneville after the expiration of the contract.

The
Review participants reasoned that selling power by subscription would align the
cost benefits and risks of access to low-cost federal power, compared to buying
power on the open market where prices are more volatile, and ensure that
Bonneville would make its annual debt repayments to the federal Treasury.
Subscription sales also would provide some surety of adequate funding for fish
and wildlife recovery, and the Review participants recommended that multi-year
budgets be developed and incorporated into Bonneville’s rate predictions.
Bonneville adopted some of the Review recommendations, including 10-year — not
20-year — subscription sales. But Bonneville worried about losing customers,
too. Many, in fact, took large portions of their load off Bonneville and tried
their luck in the wholesale market.

Market
prices were favorable until late 2000 and the first six months of 2001. During
that period, the West Coast power supply dropped, particularly in the Northwest
where a drought caused the second-lowest Columbia River runoff in 72 years of
record-keeping. The lost hydropower was equivalent to the power demand of four
cities the size of Seattle. At the same time, California’s five-year-old
experiment with its own deregulated energy system, which featured an energy
pool into which suppliers sold and from which utilities purchased, usually
through short-term contracts, was in the throes of a spectacular failure that
resulted in huge rate increases and the bankruptcies of the two largest
utilities in the state. Market prices shot up by factors of 10 and more. Prices
that had been relatively stable around $25 per megawatt-hour jumped to more
than $200 and stayed there for months.

Many
Bonneville customers, seeking relief from the high-priced market, placed large
portions of their load back on Bonneville, as they were permitted to do by law.
As a result, Bonneville was forced to buy large amounts of power on the
expensive wholesale market. In 2001, Bonneville nearly $3 billion on wholesale
power to augment its power supply. Bonneville passed these costs on to
customers, and the result was double-digit rate increases.

In
2002, a group of Bonneville’s customers borrowed some of the ideas from the
1996 energy review to develop a proposal for Bonneville’s future role in the
energy marketplace. Reasoning that competition and deregulation are here to
stay, the customers proposed that Bonneville sell its power in the future
through subscription and that customers be guaranteed a portion of the output
of the FEDERAL COLUMBIA RIVER POWER SYSTEM, not just a number of
megawatts. Thus customers would share the risk of power surpluses and deficits
and would be responsible for meeting their own demand for power in the future
in excess of the power they purchase from their “slice” of the federal power
system. Bonneville officials were interested in the concept, as it promised relief
from potentially expensive ventures into the high-priced market.

As
the Comprehensive Review made clear, energy industry deregulation created a
unique set of problems for Bonneville, a federal agency required to meet all of
the demand its public utility customers place on it. Drought, the failed
deregulation experiment in California, and the fact that West Coast power
demand continued to grow through the 1990s while the power supply remained
essentially static, exacerbated the problems for Bonneville. Dividing the
output of the federal system among Bonneville’s customers may be a way out of
the deregulation dilemma.

The concept gained
additional focus in ongoing discussions among Bonneville, its customers, and
public interest groups in a process called the “Regional Dialogue” that lasted
several years and culminated in 2006 with a proposal for power sales after
2011, when current power sales contracts will expire. From the Regional Dialogue discussions, Bonneville proposed what
it called a new paradigm for its power sales, essentially a derivation of the
Comprehensive Review proposal: After
2011, Bonneville would limit its firm power sales to its preference customers — publicly owned utilities
— to an amount approximately equal to the output
of the federal Columbia River Power System. This lowest-cost power would be
called Tier 1. Each customer would be allocated an amount of Tier 1 power
derived from a calculation that includes the customer’s load in 2010, and the
customer would be responsible for any additional power over the course of the
20-year contract period (Bonneville would make a small amount of power
available at its expense to augment the federal system if necessary to ensure
that all of its customers have enough federal power to meet their loads in
2010). As their loads grow during the 20-year contract period, customers could
buy additional power from Bonneville — but a higher rate than Tier 1, a rate
that would reflect the cost to Bonneville of acquiring the power. Or, customers
could make their own arrangements to buy additional power or invest in energy
efficiency measures to reduce their demand for power.

Bonneville
planned to make its final policy decisions in late 2006, in a sense bringing to
a close and accepting many of the recommendations — notably allocating the
federal power among preference customers and selling the power through 20-year
contracts — that came out of the Comprehensive Review of the Energy System 10
years earlier.